What Does a Hedge Fund Manager Do?

What Do Hedge Fund Managers Do?

Financial security is foremost on most people’s minds these days. In today’s ever evolving economy, planning for your financial future and looking for financial security can be a great cause of anxiety and stress. When researching avenues for reaching or maintaining financial freedom, you would have inevitably looked into the possibility of investing in stocks. If you have the ability to invest in a hedge fund, you may wonder, what does a hedge fund manager do?

Hedge fund managers, whether an individual or part of a larger team, are in charge of the management of an extremely large sum of money contributed by multiple investors. In order to mitigate risks and try to get as much return as possible, hedge fund managers perform several critical tasks including:

  • Portfolio management
  • Idea generation
  • Marketing

Hedge Funds

If you have ever considered investing or even paid attention to any investment news, you have heard the word hedge fund before. Hedge funds have the ability to make investors extremely wealthy, but they can come with very high risks. This is why hedge funds are restricted to those who are very wealthy. An investor normally has a net worth of over $1 million (not counting their residence).

Hedge funds work by pooling capital from investors and use that capital to invest in different assets. Many times, very complex techniques can be used to manage risks. The actual strategy used to handle the portfolio of the fund falls to the manager. Though this is a very simplified explanation of what a hedge fund is, it is enough that we can begin discussing what a Hedge Fund Manager does.

Portfolio Management

Portfolio Management - What Do Hedge Fund Managers Do?

Every active participant in stock trading has a portfolio. This is an array of stock market investments that they hold an interest in. Many investors will use a portfolio manager to oversee these investments for them. Hedge funds are no different.

Hedge fund managers use different methods, depending on the company, to manage their fund portfolio for their investors. This portfolio is a collection of investments that they oversee for the long-term financial goals of the fund.

While Portfolio Managers and hedge Fund Managers perform the same function, for a different set of investors, they have drastically different types of portfolios. A hedge fund is an inherently riskier venture as its goal is to make higher than average gains. To do this, they build riskier portfolios for hedge fund investors. These portfolios must be aggressively and actively managed in an attempt to mitigate some of the risk, and beat the market for better gains.



Data Mining (Data Analytics)

A hedge fund manager needs a lot of information to make the investment decisions that they have to make. One of the many ways that they get that information is data mining. This is a process that the manager works with their team of hedge fund investment analysts to do and is possibly the most crucial task in the effective management of the fund.

Data mining is almost exactly what it sounds like. It is the process of exploring and analyzing information from multiple sources. The manager and his team are looking at huge amounts of data. They are attempting to identify patterns or trends to use as leverage. This helps them to locate upward and downward swings, changes in financial status or other information that could influence the managers investment strategies.

Financial Models

What do hedge fund managers do with all of that information that they’ve gotten from data mining? Though there are useful parts in its raw form, most of it will be compiled into a financial model for the companies that it pertains to. This allows them to estimate the valuation of a company and compare it to other similar companies.

When compiling information into a financial model for companies, not only do they take into account current financial information, but financial information going back up to 5 years, as well as projections of the companies financial goals and future.

Using financial documents such as balance sheets, income statements and cash flow statements, a historical snapshot of a company’s financial health can be obtained. This will say a lot about their company overall and their management.

Assumptions of future conditions, market movements, projections and financial forecasts are considered when trying to predict the future performance of a company. Using sophisticated systems and algorithms, all of this information is compiled to determine if these companies would be a good asset to add to a fund’s portfolio.

Idea Generation

A truly gifted hedge fund manager is always thinking. They have to be. Their clients’ money is riding on them knowing the best way to invest it to minimize risk and increase returns.

Hedge fund managers have to be brainstorming constantly. They use a lot of different methods to generate new ideas for investment options, and it can be different for each manager. Some ideas are brought to them, some ideas they suss out on their own.

Sales people often pitch ideas to hedge fund managers, hoping that their ideas will earn them commissions. Managers also stay up to date on the latest financial news, read trade journals, and tap many other resources that they hold close to their chest. Managers and their teams go through all of this to generate and implement new ideas on options on types of investments, investment strategy, capital generation, and marketing. This is important, in order to try to stay ahead of market changes and keep funds moving in the right directions.


One thing that people do not attribute to a hedge fund manager, as a company or individual, is marketing. Marketing is one of those things that is done sometimes so smoothly that it’s not even noticed, however it is essential in every business. Hedge fund work included.

Hedge funds depend on clients, and very wealthy ones, to invest in the fund. The only way to attract these clients is through marketing. However, getting the clients to initially invest isn’t enough. A hedge fund manager has to build a relationship with their clients that will lead to a long term trust in their ability to successfully manage and increase their investment values. Marketing after the initial investment is what will accomplish this.

Building these relationships are what will keep the clients trusting the management during small downturns. Marketing should never be underestimated. Some hedge funds hire third party marketing companies dedicated to attracting new clients and keep existing clients happy.

Hedge Fund Manager Compensation

Hedge Fund Manager Compensation - What Do Hedge Fund Managers Do?

These are just a few of the things that a hedge fund manager does to make sure that their clients are making a better than average return on their investment and have more money in the fund to invest with. There is another common question that people have regarding hedge fund managers though. How do they make money? Are they paid salaries?

It is true that hedge fund managers have the opportunity to earn great deals of money. It is also true that they must be very good at their jobs to do this. They have built the track record behind them to attract the clients that allow them to do this. The fee structures could be set up differently for each fund, typically a nontraditional arrangement. Part of the compensation is in a flat percentage and an additional percentage based on performance of the fund.

In this type of structure, the hedge fund managers will earn flat asset management fees, for example a minimum of 3% of the assets in the fund. They would also collect a percentage based on the performance, say 30%. This is commonly referred to as a ‘3 and 30’ structure.

The flat fee can run between 1% and 4%, though it typically is 2%. Likewise, performance fees can range from 10% to 40%, but are usually 20%. These figures depend on the fund and what is agreed on by the fund managers and investors.

Depending on the size of the hedge fund, just on management fees, a hedge find manager can make over $100k a year or millions. It just depends on how much the assets in the fund are worth. Then, of course add in commissions from performance. It’s understandable why hedge fund managers are known for being wealthy.

Final Thoughts – What Does a Hedge Fund Manager Do?

Hedge fund managers have a stereotype as being wealthy and living a glamorous and extravagant lifestyle. What most people don’t realize is how much work and stress goes in to making the money to live the glamorous style some of them prefer. There is no doubt that having the intelligence and creativity to succeed as a hedge fund manager, in charge of millions, is a very rare attribute that not many have. However, if you do have these skills, make use of them.

Related Posts

  1. What is a Hedge Fund?
  2. Why Do Hedge Funds Exist?
  3. Why Do Hedge Fund Managers Make So Much Money?
  4. How Do Hedge Funds Make Money?
  5. Risks and Rewards of Investing in Hedge Funds
  6. How to Get a Job at a Hedge Fund
  7. How Can I Invest in a Hedge Fund?
  8. How to Start a Hedge Fund
  9. Are Hedge Funds Regulated?




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